We have all faced a difficult period in life where we feel the need to borrow money for many reasons. However, when it comes to borrowing, you need to carefully access the options at your disposal in order to make a smart decision. If you are considering taking a secured loan, then here's an overview of all you will need to know to about this type of funding.
Secured loans explained
There are lots of ways you can access credit. Each option has its own unique set of rules that both lenders and borrowers ought to know. With that in mind, secured loans are a method of acquiring funding where the applicant will use their property to secure the loan. The bank uses this property to cushion itself against the risk of bad debt. In most cases, the amount you can borrow is proportional to the value of the property in question.
Ascertaining the loan limits
It is important to understand how financial institutions determine how much money they can lend to applicants. The lending institution will consider the aspects such as the value of your property, your current financial situation as well as you creditworthiness to determine how much money you qualify to borrow.
Accessing a borrower's creditworthiness
The issue of loans is a sensitive one. However, lending institutions have devised a way to evaluate and rank borrowers through credit scores. First, the bank will go to your credit profile to gauge how well you have managed debts in the past. A credit file primarily includes information such as your credit card and mortgage transactions. There are a few things you can do to improve your credit rating. First, ensure that you pay your credit card commitments on time without default.
Who qualifies for a secured loan?
This type of funding is ideal for people who have a mortgage and wish to borrow a large sum of cash than is possible through conventional personal loans. It is common to have people access between £5000 and £500,000 through this type of loans. So, if you have a home or a car that you can use for security, then you qualify for this form of funding. People who have experienced difficulty soliciting a loan through other means due to either a poor rating or by virtue of being a first-time borrower also qualify for the credit.
Computing the cost of borrowing
Even though you are putting your property on the line to access funding, lenders will still charge you a fee which they call financing cost. The cost comes in the form of interest rates which they charge on the principal amount. As part of your loan repayment program, you will have to remit a fixed amount of money every month to your lender. You will do this every month, until the end of your loan servicing period.
Fluctuating interest rates
Note that the cost of financing does differ depending on the borrower's financial status. People with a high credit score can negotiate with their bankers for lower interest rates. In a bid to cover their risks when dealing with suspicious borrowers, most lenders will raise interest rates. This move is meant to protect the lender from the high risk of default without locking out such individuals from accessing loans.
Read and understand the terms in the contract
It is imperative that you carefully go through the nitty-gritty pertaining to the loan contract. There is usually a high price to pay if you do not honour your obligations. Many people have been taken to court and lost their property due to late payments and loan default. Once our property is put up for sale, the lender enjoys the right to receive payment first, and then what remains goes to the borrower.
Borrowing costs can be difficult to establish especially where variable rates apply. When the economy takes a turn for the worse, bankers tend to revise their rates upwards making borrowing and loan repayment more expensive. Make sure you that are terms are tenable before you decide to borrow.